* Exits resolution, ready for AGM, share to range 20-30c *
* Haircut at 47.5%; 15% released; 37.5% in fixed depos *
* €8 bln in recap, Core Tier 1 boosted to 12% *
Bank of Cyprus is out of a state of resolution and there is no turning back. The government and the Central Bank have agreed on a final haircut on all unsecured deposits according to the bail-in terms set by the Troika, paving the way for the island’s largest lender to proceed with its first post-resolution shareholders’ meeting in early September.
After that, Bank of Cyprus will see major changes in its structure, the way it does business and (hopefully) the speed with which it will recover and return to profitability, with the stock trading again in the final quarter of the year.
Effectively, the recapitalisation and the exit from resolution means that the Bank of Cyprus will be eligible for funding from the European Central Bank through the overnight lending facility that other banks rely on, usually through the securitisation of deposits.
“These development put an end to an extended period of uncertainty,” the central bank and ministry said in a joint statement.
Already, the bank is reinventing itself with its combined workforce, including former Laiki Popular staff, expected to be reduced by about a thousand by the end of this week. The branch network will eventually be reduced from 207 prior to the crisis to about 125-130, while back-offices services and administration are already being consolidated and streamlined.
The size of the new bank and its impact on the local economy also oblige the state to consider and seem to consider Bank of Cyprus as a systemic bank, with all the repercussions that this could mean.
The main focus of operations of the new bank in the making will be Cyprus with the Group retaining its profitable subsidiaries EuroLife and General Insurance Co., as insurance brokerage is a significant part of Group revenues, and launching new products and services for its retail and commercial banking in a month’s time.
Overseas non-essential assets, such as a portfolio of 610 properties in Greece worth about 200-300 mln euros, will be bundled into a Property Development Bank and will not necessary be sold, while a team of experts has been dispatched to Russia to help with Uniastrum, the controversial subsidiary that has caused more headaches to the Group than its share of profits. The new shareholders will decide whether to hold on to the Russian subsidiary, that is widely regarded to be too big for the total size of the Group, or whether it will be spun off and sold.
The plan is for the restructured bank to have two faces, a commercial bank and an investment bank, and to maintain a steady pace of growth, although with some exceptions, such as the merged operations in the U.K. that seem more promising than ever, potentially on a path to further development.
THE HAIRCUT
The Finance Ministry and the Central Bank have agreed on a final 47.5% haircut on all unsecured deposits above 100,000 euros, far less than the 60% that had been held in reserve, but still higher than the 42.5% haircut that the government had been pushing for.
This capital will be converted to shares and will represent about 99.5% of the new shareholders, with the remaining 0.5% diluted among the shareholders prior to the March Eurogroup meeting that forced the bail-in on Cyprus. The conversion of deposits to shares is the equivalent of about 8 bln euros in depositors' cash and will boost the bank’s Core Tier 1 ratio to about 12%, officials said.
The biggest shareholder with about 18% will probably be legacy depositors in Popular Laiki, representing its own depositors who have seen their savings wiped out. The new shareholders’ list will be ready within a week, according to a Reuters report. Chances are high it will include Russians, many of whom lost millions parked in Cypriot banks, the report said.
The new shares will be issued at a nominal value of 1 euro and are expected to be listed on the CSE some time after October 1.
Brokers and analysts contacted by the Financial Mirror expect the new BOCY stock to trade in the range of 20-30c a share, adding that at this stage, the stock price projection is based purely on expectations.
Following the final haircut on deposits, of the remaining 42.5%, some 12% of that (or 5.1% of the total deposit) will be placed in a current account and the balance in three equal fixed term deposits – a 6-month bearing 2.95% interest, a 9-month at 3.125% and a 12-month at 3.4%. The interest is subject to a 30% tax.
This means that for unsecured deposits held in March, all amounts above 100,000 euros will be subject to a haircut of 47.5% and converted to shares, 37.5% will be placed in the three fixed deposits and the balance of 15% will now be free.
NEW BOARD
The Group’s restructuring started in June with the Central Bank, as the Troika-appointed administrator, selecting an interim board that in turn chose a chairman and CEO. By September 30, a final restructuring plan will be submitted by consultants McKinsey Associates, to be approved by the new shareholders who will have their say at the AGM to be held on or about September 12.
It is widely believed that CEO Christos Sorotos, with 37 years of international banking experience, and several members of the board will want to stay on and continue what they have started.
But the most important issue to be resolved is that of confidence in the brand, trust to be reinstated in the banking system and the introduction of good corporate governance principles, something that has been lacking at both BOCY and Laiki in recent years, as revealed during the public inquiry into what caused the collapse of the island’s banking system.
FUTURE PLANS
As regards existing portfolios, the current management does not intend to place individually mortgaged real estate with the new Development Bank, that will handle primarily large-scale projects.
Non-performing loans (NPLs) will be dealt with by copying best practices of other banks, while the final decision to abandon the initial plans for an asset managementt company and replace it with a property development bank, lies solely in the methodology to better utilise and distribute the Emergency Liquidity Assistance (ELA) afforded to Bank of Cyprus after it inherited Laiki Popular’s debts.
By the end of August all the painful restructuring should be over and in September the bank will introduce new programmes and products to take take it up to the end of January 2014.
The current management team, headed by the new CEO and his ten deputies, seems to be optimistic at the pace of events, confident that with a very high quality of staff, they can pull through.
“The support of just 25% of our enthusiastic staff is sufficient to drive the bank forward,” a senior banker recently told the Financial Mirror, adding that many senior managers and branch heads have reached a stage of exhaustion, what with the drastic changes that had been imposed on them.
The next hurdle after the AGM, where the sole item on the agenda will be to appoint a new board, will be to conclude the financial reporting for individual companies as at December 31, 2012 and then to conclude the Group consolidated accounts as at June 30, 2013.
Corporate clients will remain a priority, with hundreds of customers in Greece with letters of credit and other needs currently being served through a presence in Athens, that, in any case, will not develop into normal banking operations with doeposits and loans following the surrender of the BOCY, Laiki and Hellenic Bank networks to Piraeus Bank, as part of the bailout agreement with the Troika.
